Bears Continue to Prowl Homebuilding Shares

Today’s tickers: XHB, XLB, APWR, FXI, S, EEM, XLU, UAUA & ACOR

XHB– Shares of the homebuilders fund have dropped 4% today to stand at $11.65. We observed one near-term bear pawing at put options on the ETF in the June and July contracts. The trader took profits on one chunk of put options by selling to close out a long position. It appears that he originally purchased 10,000 puts at the June 12 strike price for an average premium of 20 cents apiece. Today he sold the same 10,000 put options which are currently in-the-money for 40 cents per contract. The investor makes a nice 20 cent per contract gain on the trade, which he may have applied toward the purchase of 10,000 puts at the more bearish July 11 strike price at a cost of 45 cents apiece. The underlying shares of XHB would need to fall another 9% through the breakeven point at $10.55 in order for the trader to amass profits on the new long put position. – SPDR Homebuilders ETF

XLB – The Materials ETF has experienced a share price decline of approximately 3.5% to $27.01. The XLB ticker symbol jumped onto our ‘most active by options volume’ market scanner after a massive chunk of 50,000 calls were traded in the near-term June contract. The 50,000 calls traded to the middle of the market at the June 28 strike price for a premium of 15 cents apiece. We noted the presence of some 59,000 lots of open interest at the June 28 strike price. Upon further investigation, it appears that back on May 20, 2009, 50,000 calls were purchased for 90 cents per contract. If today’s trade represents the closing sale of the same 50,000 calls by the same investor, he has realized a net loss of 75 cents per contract or $3,750,000 in total. – Materials Select Sector SPDR

APWR – The Chinese power generation systems manufacturer appeared on our ‘hot by options volume’ market scanner amid a more than 4% decrease in its share price to $12.35. One investor hoping to benefit from limited bearish movement in the stock populated the September contract today. It appears that the trader sold a strangle in order to fund the purchase of in-the-money put options. The strangle was established through the sale of 3,000 puts at the September 10 strike price for 1.26 apiece in combination with the sale of 3,000 calls at the September 17.5 strike for 97 cents each. The gross premium enjoyed on the trade amounts to 2.23. It looks as though the 2.23 premium was applied toward the purchase of 2,000 in-the-money puts at the September 12.5 strike price for 2.73 per contract. – A-Power Energy Generation Systems Ltd.

FXI – Shares of the China fund are off by more than 4% to $37.93. We observed one investor selling volatility in the form of a sold straddle in the August contract. The investor shed 7,000 puts for 3.45 apiece at the August 38 strike price as well as 7,000 calls at the same strike for 2.66 per contract. The gross premium enjoyed on the trade amounts to 6.11. This trader will retain the full premium if shares settle at $38.00 by expiration in a couple of months. The premium will erode into losses if shares were to move away from the central strike price and breach either the breakeven point to the upside at $44.11 or the breakeven point to the downside at $31.89 by expiration. Option implied volatility is up around 4% standing at 47.5% today on Chinese shares. – iShares FTSE/Xinhua China 25 Index Fund

S – Bullish option traders were attracted to the wireless communications provider today amid a rally in its shares of approximately 3.5% to $5.48. The July 6.0 strike price had more than 16,500 calls purchased for an average premium of 29 cents apiece. Investors long of these call options will begin to amass profits if shares can gain another 15% from the current price to breach the breakeven point at $6.29 by expiration next month. Bullish sentiment spread to the August 6.0 strike price where about 5,700 calls were purchased for 46 cents per contract. Traders targeting calls in the August contract are hoping to see shares climb higher than the breakeven point at $6.46 over the next two months. Sprint appeared on our ‘top option implied volatility % gainers’ market scanner this morning with volatility on the stock peaking at 85% up from Friday’s volatility reading of just 63%. – Sprint Nextel Corporation

EEM – Shares are lower by 4% at $32.40. Last week we took note of chunky put spreads aimed at protecting against further downside. Today’s standout trade is noteworthy since we’re not 100% sure what it is. Some 6,500 calls and puts traded in the December contract simultaneously. The 24 strike puts and the 45 strike calls traded at premiums of 1.15 and 35 cents respectively marked down as spreads. There are two alternative scenarios here. In the first case we’d be looking at sales of both by the investor looking to bank premium from a short strangle in the hope that the stock would remain within the two strikes by expiration. In this case the total premium would be 1.50. However, the trade was not marked as a strangle and that raises the prospect that it was a reversal in which the calls were sold to help cheapen the cost of funding the lower strike puts. Instead of paying 1.15 for downside protection this investor is bringing the cost down to 80 cents and so raises the breakeven point to $23.20, which would still require an expiration-based decline in the share price of 28%. – iShares MSCI Emerging Markets

XLU – With markets melting around the globe possibly over fears that heated investor sentiment was at boiling point to the upside, even utility shares are on the wane today. Traditionally the sector makes for a good defense when the going gets tough. But not today as the select sector ETF share price has dropped 2.3% to $27.54. However, a block of 50,000 call options at the January 30 strike traded for a dollar apiece earlier on the ISE. That’s a sizeable order for this series and when you look at surrounding options volume it’s pretty thin – only 3,000 options outside of this single order are in play today. The block traded to the middle of the market, which means we can’t state unambiguously whether this is naked call selling in which the call writer would benefit from a decaying premium should shares weaken, or whether a longer term bull hopes to capitalize from a rally in the share price while retaining the premium from the calls – that would make this strategy a covered call. Finally, this could be pure outright bullishness put into play through place by the opening purchase of a chunk of calls. If so, shares will need to rally by 16% from present through expiration in seven months time. – Utilities Select Sector SPDR

UAUA– Airlines continue to combat weak demand by slashing prices of their profitable business-class seats in an attempt to fill planes. The price-cuts may fill more seats but are a killer for airlines’ much needed incoming revenue. Shares of the Chicago-based owner and operator of United Airlines have declined dangerously close to the 52-week low on the stock of $2.80 attained nearly one year ago on July 15, 2008. Today the stock has slipped 3.5% to $3.69. In response to continued price erosion, one investor looked to the in-the-money September 4.0 strike price to purchase 8,500 puts for an average premium of 1.10 per contract. He will begin to garner profits on today’s trade in the event that shares decline beneath $2.90 by expiration in three months. This transaction indicates extreme bearishness on UAUA’s stock. – UAL Corporation

ACOR – The commercial-stage biopharmaceutical company appeared on our ‘hot by options volume’ market scanner amid bullish call buying by some investors looking for upward price movement in the stock through June expiration. Shares of the firm have climbed higher today by 4% to $26.55. Option traders latched on to approximately 3,000 calls at the June 30 strike price for an average premium of 35 cents apiece. These calls will prove profitable if ACOR’s share price can rise 14% through the breakeven point at $30.35 by expiration. Option implied volatility on the stock surged up to 82% today from Friday’s volatility reading of 66%. – Acorda Therapeutics, Inc.